How Should You Buy Gold? Physical vs. Paper Gold

How Should You Buy Gold? Physical vs. Paper Gold

A diversified investment portfolio is an excellent way to protect your wealth. Among the many different options, from stocks and bonds to real estate and fine art, one of the best is to buy gold. Of all the precious metals, gold has been a dependable investment around the world for centuries.

One of the two most common ways to accumulate gold is to purchase “paper gold”. Paper gold refers to investing in exchange-traded funds (ETFs) that themselves invest in gold or in gold futures and options. The other method is to purchase physical gold, usually in bullion bars or coins.

We would like to offer a list of reasons why you should protect your wealth by investing in physical gold:

1. Tangible with Intrinsic Value through Scarcity and Stability

Physical gold is real and tangible. It is impossible to create artificially. Physical gold must be mined and extracted from gold deposits, of which there is a finite amount. This process grows more difficult and expensive as these gold deposits become more scarce. This scarcity adds to physical gold’s intrinsic value.

In contrast, paper gold in itself does not have an intrinsic value as its worth relies on the issuer and the terms of the issuance, not necessarily on the underlying gold alone.

2. Universally Accepted Throughout World History and Cultures

Gold has been universal currency and symbol of prosperity around the globe for millennia. From the treasures of ancient Babylon to the most fortified vaults in Fort Knox, the legend of King Midas to James Bond’s Goldfinger, the first Olympic medals to this year’s Oscar awards — gold has played an essential role in human history as a sign of wealth, prosperity, and achievement.

Before paper currency, gold itself was used as money for over 2,300 years. Persia, ancient Greece, and the Roman Empire through to the colonial empires of Spain, Portugal, and Britain used gold for currency. Fiat currencies used the gold standard for valuation well into the 20th century. So, to this day, gold is recognized as a global currency.

Compared to paper gold and fiat currencies, physical gold is much more stable. It can withstand political and government interference, as its value extends beyond national borders. And while other investments and fiat currencies have come and gone, physical gold is still highly valued, even after thousands of years.

3. Hedge Against Inflation and Currencies

Physical gold retains its value and purchasing power even through long periods of time, holding its own against inflation. The following chart is an excellent example. It compares the price for one liter of beer at the Munich Oktoberfest in euros to gold since 1950.

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You can see that buying a liter in fiat currency increases over the years, while gold holds steady. Tellingly, the spike from around 1971 correlates to the USD leaving the gold standard, affecting most other currencies. Furthermore, the US dollar has lost more than 98% of its value relative to gold since 1913.

Physical gold not only retained its purchasing power, but its value is not affected by inflation or fiat currency values. Historically, gold prices are inversely correlated to the USD and other currencies (gold goes up as USD goes down). This makes gold a reliable hedge against inflation and currency risks that would affect paper gold.

4. Safe Haven from Counterparty and Other Risks

Because physical gold is not linked to a government or monetary system, it can be a safe haven against many different risks. During uncertainties caused by financial or political turbulence, many financial institutions that act as counterparties to paper gold will be adversely affected, which will have a knock-on effect to the paper gold value.

Physical gold, as a tangible asset, is also safe from cyberattacks and hacking risks that paper gold might have, especially if that paper is held electronically.

Also, physical gold is much easier to liquidate. It belongs 100% to you. There is no need to go through a counterparty or worry about regulatory formalities when buying or selling gold coins or bars.

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5. Confidential and Independent Ownership

Just as physical gold is not linked to a government or financial system, neither is ownership of physical gold. So, it is not dependent on any banking system for its value or its regulation. It can be bought, sold, and stored privately and confidentially. You can keep it on your property in a safe or at a secured storage facility or vault.

Unlike paper gold, which is essential a financial product regulated by an exchange or authority, any physical gold transactions can occur confidentially without having to involve third parties, such as banks or regulators.

6. Preferred by Central Banks and as Collateral

Because of physical gold’s intrinsic value, independence, and other benefits listed here, owners can use this highly liquid asset as collateral for loans as it is extremely attractive to financial institutions. Paper gold does not hold the same appeal. And it is these same benefits that draws central banks to accumulate gold, even as it technically competes with their own fiat currencies. Actually, by holding physical gold as a reserve asset, central banks can stabilize their fiat currencies in a way that is not possible with paper gold.

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7. Direct Parity to an Actual Asset

If you look at all the paper gold, such as through the London wholesale gold market or US COMEX gold futures, the volume traded is massive when compared to the actual amount of physical gold available. This is because the paper gold actually is backed by very little physical gold. Furthermore, ETFs, one of the most popular forms of paper gold, is linked more to the price of gold, not the physical asset itself. So, to convert paper gold to physical gold would be extremely difficult, if not impossible.

This proves extremely problematic for paper gold if ever markets become unsustainable. While physical gold holds its value and is easily liquidated, bought, and sold, paper gold is victim to increasing regulatory oversight and requirements as well as counterparty risks and possible collapse.

8. Better for Bequeathing

Gold bars and coins are ideal when planning family inheritances. Physical gold is tangible, maintains long-term value, and is highly liquid, so it is fantastic for wealth preservation. Physical gold is determined by weight, such as troy ounces and kilograms, allowing it to be distributed equitably among recipients, particularly through wills and trusts.

Paper gold is a financial product usually issued by a bank. So, it may need to be linked to a bank account and will have to follow all banking regulations regarding inheritance. Physical gold can be given directly to family members so that they have immediate access at anytime.

These are just a few reasons why physical gold is a much more attractive investment that paper gold. Ultimately, it is a key component for any diverse portfolio. This is backed by numerous studies, including from the World Gold Council. Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, suggests allocating 10% of a multi-asset portfolio to gold. Stable, independent,confidential, highly liquid, easily managed, secure against many risks — physical gold is an asset that you should leverage to protect your wealth and diversify your portfolio.

J. Rotbart & Co. is here to address all your physical gold, and other precious metals, needs. We provide a range of services, such as purchasing, selling, transporting, and storing physical precious metals. We source gold, silver, platinum, and palladium bullion bars and coins globally in a secure and confidential manner. If you want to secure your wealth and diversify your portfolio, contact us at info@jrotbart.com to fulfill your physical precious metals needs.


J.Rotbart & Co